Court Denies Bad-Debt Business Deduction.* A taxpayer formed a corporation to acquire and rehabilitate 1. To restore to good health or useful life, as through therapy and education. 2. To restore to good condition, operation, or capacity. re  ha·bili·ta tion n. financially distressed companies. He lent the corporation millions of dollars, but eventually it became financially distressed. On his personal income tax return, the taxpayer deducted the unpaid loans as a business bad debt Bad Debt A debt that is not collectable and therefore worthless to the creditor.Notes: Bad personal debts generally aren't deductible. See also: Credit Rating, Credit Risk, Debt, Default Risk, Impaired Credit . The IRS denied the deduction. It argued the taxpayer was not in the business of lending money. The taxpayer countered that the loans related to his business of "buying, rehabilitating and reselling corporations." The circuit court agreed with the IRS, finding that the taxpayer was merely an investor who provided working capital to the corporation. There was no evidence, the court said, that the taxpayer actively managed the corporation or provided any services to the distressed companies. Therefore, the court denied the company's bad debt deduction and held the loans were nonbusiness debts (Commissioner v. Melvyn L. Bell, 8th Cir.,1-5-00). --Michael Lynch, CPA, Esq., professor of tax accounting at Bryant College, Smithfield, Rhode Island. |
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